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Thursday, April 10, 2014

Federal Reserve officials worried about inflation and the signals they were sending about interest rates at their two day policy meeting March 18-19.

Some officials argued they needed to send a stronger signal that they wanted to see inflation move up toward the Fed’s 2% objective. Some also worried that their interest rates projections might be incorrectly viewed as leading toward a more restrictive policy.

Here is a look at key passages from the Fed minutes:

1) DOT ANGST: Fed officials worried at the meeting that their individual projections for short-term interest rates could be misleading. Some officials pushed up their projections for rates in 2015 and 2016, which would be made public in the Fed’s release of projections with its official policy statement. They wanted to avoid sending the message that the group as a whole anticipated more restrictive credit policies. Right after the meeting, many analysts and investors did worry that the Fed had become more hawkish, despite Fed chairwoman Janet Yellen’s efforts during her press conference to play down the meaning of the shift in projections.

“A number of participants noted the overall upward shift since December in participants’ projections of the federal funds rate included in the March (projections), with some expressing concern that this component of the (projections) could be misconstrued as indicating a move by the Committee to a less accommodative reaction function. However, several participants noted that the increase in the median projection overstated the shift in the projections. In addition, a number of participants observed that an upward shift was arguably warranted by the improvement in participants’ outlooks for the labor market since December and therefore need not be viewed as signifying a less accommodative reaction function. Most participants favored providing an explicit indication in the statement that the new forward guidance, taken as a whole, did not imply a change in the Committee’s policy intentions, on the grounds that such an indication could help forestall misinterpretation of the new forward guidance.”

2) LOW INFLATION WORRIES: Fed officials discussed at length the continued run of inflation below the central bank’s 2% objective. Some officials wanted to make it clearer in their policy statement that the Fed wouldn’t tolerate low inflation and they agreed to monitor the data carefully.

“A couple of participants expressed concern that inflation might not return to 2 percent in the next few years and suggested that a protracted period of inflation below 2 percent raised questions about whether the Committee was providing an appropriate degree of monetary accommodation … a few participants proposed adding new language in which the Committee would indicate its willingness to keep rates low if projected inflation remained persistently below the Committee’s 2 percent longer-run objective; these participants suggested that the inclusion of this quantitative element in the forward guidance would demonstrate the Committee’s commitment to defend its inflation objective from below as well as from above. Other participants, however, judged that it was already well understood … in light of their concerns about the possible persistence of low inflation, members agreed that inflation developments should be monitored carefully.”

3) LOW RATES FOR THE LONG-RUN: Fed officials agreed that they would likely keep short-term interest rates low well into the future, but they had different reasons for coming to this view:

“Participants observed that a number of factors were likely to have contributed to a persistent decline in the level of interest rates consistent with attaining and maintaining the Committee’s objectives. In particular, participants cited higher precautionary savings by U.S. households following the financial crisis, higher global levels of savings, demographic changes, slower growth in potential output, and continued restraint on the availability of credit.”

4) STAFF A LITTLE MORE PESSIMISTIC: Fed staff members shaved down some of their growth projections and said the recent weakness wasn’t all because of bad weather.

“Largely because of the combination of recent downward surprises in the unemployment rate and weaker-than-expected real GDP growth, the staff lowered slightly the assumed pace of potential output growth in recent years and over the projection period. As a result, the staff’s medium-term forecast for real GDP growth also was revised down slightly…

“The staff viewed the extent of uncertainty around its March projections for real GDP growth and the unemployment rate as roughly in line with the average of the past 20 years. Nonetheless, the risks to the forecast for real GDP growth were viewed as tilted a little to the downside, especially because the economy was not well positioned to withstand adverse shocks while the target for the federal funds rate was at its effective lower bound.”

5) CHINA FOCUS: Officials appear to have become a bit more concerned about the economic outlook in China.

“It was suggested that slower growth in China had likely already put some downward pressure on world commodity prices, and a couple of participants observed that a larger-than-expected slowdown in economic growth in China could have adverse implications for global economic growth.”

6) A THREE DAY MEETING: Janet Yellen is known inside the Fed as a glutton for preparation. That proved true at her first meeting as chairwoman. She gathered Fed officials on a March 4 conference call, two weeks before the planned meeting, to discuss some of the issues that would come up when they met in person March 18-19. This is an early clue on Ms. Yellen’s leadership style – preparation and lots of consultation with colleagues.

“The Committee met by videoconference on March 4, 2014, to discuss issues associated with its forward guidance for the federal funds rate. The Committee discussed possible changes to its forward guidance that could provide additional information about the factors likely to enter its decisions regarding the federal funds rate target as the unemployment rate approached its 6½ percent threshold and once that threshold was crossed. The agenda did not contemplate any policy decisions, and none were taken.